Thornburg International Growth ADR Strategy

3rd Quarter 2019

Greg Dunn
Greg Dunn
Portfolio Manager and Managing Director
Sean Koung Sun, CFA
Sean Koung Sun, CFA
Portfolio Manager and Managing Director
Portfolio managers are supported by the entire Thornburg investment team.
October 19, 2019

For the third quarter of 2019, the Thornburg International Growth ADR Strategy–Wrap returned negative 3.45% (net of fees), trailing its benchmark, the MSCI All Country World ex-U.S. Growth Index (the index), which returned negative 0.85%. This brings the full year 2019 return to 11.39% for the strategy, versus 16.21% for the index. We are disappointed to be trailing the benchmark, but as we have said in the past, to us successful investing is a marathon and not a sprint. Business value is compounded over long time horizons, not shorter ones, and we remain committed to working as hard as possible to deliver outperformance over the long term.

While domestic equities delivered a modest gain this quarter, international equities posted their first quarterly decline this calendar year. August saw trade tensions intensify as China announced retaliatory tariffs in response to an earlier round of U.S. tariffs. The U.S. quickly followed suit with another 5% tariff increase on a wide tranche of products. Investors worried that matters were spiraling towards an irreconcilable outcome, but like what we saw earlier this year, both parties took a step back, and trade tensions de-escalated somewhat when the U.S. delayed some tariffs and China purchased U.S. agricultural products as a signal of goodwill. Trade talks are set to resume in October, and while a “mini-deal” may be possible, a broad-based agreement appears elusive.

Bond markets and the presence of inverted yield curves in the U.S. and Europe are signaling that recession risks are increasing. Leading indicators of trade and manufacturing activity fell in the U.S. and eurozone. Notably, the eurozone manufacturing Purchasing Managers Index fell to 45.6% in September, the lowest in seven years. In the U.S., the same indicator fell to the lowest level in a decade.

The lackluster readings are likely related to the impact of global trade tensions, as increased uncertainty has discouraged business investment.

Against this backdrop of slowing growth, the European central bank cut interest rates another 10 basis points (bps) and will restart bond purchases of €20bn a month. The U.S. Federal Reserve also eased, cutting rates by a quarter point for the second time this year. These actions were taken positively by the markets, but in the face of a maturing global business cycle, it remains to be seen if global economies are simply in a period of slower growth, or on the verge of a recession.

Top performers for the quarter included U.K. pharmaceutical company Astra-Zeneca, Japanese mergers and acquisitions advisory firm Nihon M&A Center, global payment solutions provider Worldpay, U.K. online food delivery marketplace Just Eat and video game developer Activision Blizzard.

AstraZeneca shares rose as they reported a solid quarter that exhibited robust underlying growth in their key oncology franchises. Furthermore, there was a bevy of late stage trial data read outs over the summer, with nearly all of them positive.

Nihon announced financial results that saw quarterly sales grow strongly on a year-over-year basis as the number of deals closed was higher than expected. Margins rebounded as well, which had been somewhat depressed recently, sitting below historical company averages the past several quarters. Nihon M&A remains well positioned to address a large and under-penetrated market opportunity as many small- and medium-sized enterprises in Japan, oftentimes family-run businesses, lack successors and will need to transition ownership over time.

NOTABLE PURCHASES
(June 2019-August 2019)
NOTABLE SALES
(3Q19)
Netflix, Inc. Worldpay, Inc.
DouYu International Holdings, Ltd. Farfetch, Ltd.
Fidelity National Information Services, Inc. Baidu, Inc.
Adyen NV Domino’s Pizza UK & Ireland, Ltd.
Notable purchases and sales includes material transactions other than recently purchased securities, which may be excluded for best execution purposes.

Worldpay saw its previously announced acquisition by Fidelity National Information Services (FIS) formally completed during the quarter. In addition, the newly combined company raised its guidance for merger synergies as the integration process has been progressing better than expected.

Just Eat shares rallied as the company received an all-share merger offer from Netherlands-listed peer Takeaway.com. The terms of the merger valued Just Eat at a modest premium to the previous close.

Activision Blizzard is a leading publisher and developer of video games. Shares performed well in the quarter primarily on the outsized success of the World of Warcraft Classic re-release, which saw much higher engagement than was expected. Shares had been weak, so the shift in sentiment had a meaningful impact on share performance.

Bottom performers this quarter were U.K. software provider Blue Prism Group plc, Chinese educational services provider TAL Education Group, Chinese internet technology company Tencent Holdings, German kidney dialysis services and equipment provider Fresenius Medical Care and global luxury goods e-commerce platform Farfetch.

Blue Prism is a pioneer in the emerging Robotic Process Automation (RPA) industry. RPA is a high-ROI software solution that is used to free humans from repetitive tasks and reduce errors. In early June, the company reported lower-than-expected revenue growth as it made changes to its go-to-market strategy.

TAL declined as quarterly results fell short of market expectations due to slower offline enrollment growth and a miss on margins due to higher promotional spending to acquire online students. We believe this spending is well placed, as the company should be able to retain and effectively monetize these students over time.

Tencent reported sales growth that fell short of market expectations due primarily to a slowdown in the broader Chinese advertising market.

Fresenius shares drifted lower as the U.S. president signed an executive order called Advancing American Kidney Health. Although the various proposals represent a variety of potential positive and negative impacts, some of the goals outlined by the policy that would be most unfavorable to Fresenius may not ever be achievable. We believe Fresenius’ business model can be resilient, but the stock has declined as regulatory risks have incrementally increased.

Farfetch reported a negative second quarter, with shares being impacted by multiple factors: 1) management cited that competition was hurting growth, 2) the company completed an acquisition that deviated from the strategy outlined during the IPO roadshow, and 3) an executive exited the company.

Outlook

A multitude of risks are converging on equity markets and economic growth has slowed in many parts of the global economy. The world’s two largest economies, the United States and China, seem unlikely to concede meaningful ground to one another in order to resolve the ongoing trade dispute. We may see some progress in the form of a more narrowly constructed agreement that addresses just a handful of issues, but that would be a best-case scenario over the near term. With the dispute dragging on, both countries are experiencing a worrying downtrend in leading economic indicators, such as trade and investment activity.

We see global growth troughing at low, but not negative, levels because of recent stimulus measures and various policy tools that policy makers have at their disposal to counterbalance slowing growth. Investors expect the Fed to remain on the path towards further easing, although a hawkish contingent remains resistant. Hopes for fiscal stimulus out of Germany are increasing and the European Central Bank remains historically accommodative. China also has the capacity to enact further stimulus, although it appears their priority is to keep growth stable with modest amounts of piecemeal stimulus, rather than embarking on an outsized plan, like post the financial crisis. The path from here remains bumpy, given continued trade risks and political risks, such as an unresolved Brexit and ongoing protests in Hong Kong. However, we are encouraged by generally resilient consumers that are benefiting from low unemployment, healthy labor markets and modestly rising wages.

We expect to see a wider dispersion of investing outcomes, with gains less broadbased in a slowing environment. These conditions should favor bottom-up stock selection and our process, which focuses on high-quality growth companies with secular-growth opportunities that can sustainably compound value over the long term through idiosyncratic factors, such as expanding market share, deepening economic moats, superior technology and best-in-class execution. The businesses we own in the portfolio today are well positioned for long-term growth, and we remain excited about their prospects.

We thank you for investing in the Thornburg International Growth ADR Strategy-Wrap.

Top Performers (3Q19)
(Representative Account)

NAME CONTRIB % AVG WGT %
AstraZeneca plc. 0.29 3.58
Nihon M&A Center, Inc. 0.28 1.93
Worldpay, Inc. 0.27 0.95
Just Eat plc 0.25 1.23
Activision Blizzard, Inc. 0.21 1.88

Bottom Performers (3Q19)
(Representative Account)

NAME CONTRIB % AVG WGT %
Farfetch Ltd. -0.77 0.74
Fresenius Medical Care AG & Co. KGaA. -0.36 2.31
Tencent Holdings Ltd. -0.34 3.9
TAL Education Group -0.25 2.57
Blue Prism Group plc -0.24 0.57

Past performance does not guarantee future results. To obtain the calculation methodology and a list showing the contribution of each holding in the representative account to the overall account’s performance during the reporting period, please email a request to bdg@thornburg.com. The holdings identified do not represent all of the securities purchased, sold or recommended for advisory clients.

Important Information

Unless otherwise noted, the source of all data, charts, tables and graphs is Thornburg Investment Management, Inc., as of 9/30/19.

Performance data for the International Growth ADR Strategy is from the International Growth ADR Wrap Composite, inception date of May 1, 2010. The International Growth ADR Wrap Composite includes discretionary wrap accounts invested in the International ADR Growth Strategy. Returns are calculated using a time-weighted and asset-weighted calculation including reinvestment of dividends and income. Periods less than one year are not annualized. Individual account performance will vary. The performance data quoted represents past performance; it does not guarantee future results. “Pure” Gross returns do not reflect the deduction of any expenses, including trading costs and are supplemental to net returns. Beginning January 1, 2009, net returns reflect the deduction of the maximum total wrap fee which is currently 3% per annum. Net returns are derived from subtracting 1/12th of 3% from each account's monthly gross return. The total wrap fee includes all charges for the trading costs, portfolio management, custody and other administrative fees. Prior to January 1, 2009 net returns reflect actual wrap fees for each account in the composite. Beginning January 1, 2014 returns reflect the deduction of transaction costs for some accounts in the composite. The standard fee schedule currently in effect is: 1% to 3% on all assets. Fees may be negotiated in lieu of the standard fee schedule. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. The firm's fees are available upon request and also may be found in Part II of its Form ADV.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

Holdings may change daily and may vary among accounts.

The information provided herein should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account's entire portfolio and in the aggregate may represent only a small percentage of an account's portfolio holdings. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

Portfolio holdings and characteristics shown herein are from a representative account managed within the investment composite. The representative account is selected based on account characteristics that Thornburg believes accurately represent the investment strategy as a whole. Should these characteristics change materially, Thornburg may select a different representative account. Holdings may change daily and may vary among accounts, which may contribute to different investment results. The representative account information is supplemental to the strategy’s composite and GIPS compliant presentation.

Portfolio construction will have significant differences from that of a benchmark index in terms of security holdings, industry weightings, asset allocations and number of positions held, all of which may contribute to performance, characteristics and volatility differences. Investors may not make direct investments into any index.

Please see our glossary for a definition of terms.

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